The rate of turnover in a portfolio of futures contracts, and the transaction costs that result from turnover, is a major issue with commodity futures trading and with the various indexes that are representative of futures trading. Turnover in traditional stock and bond indexes such as the Standard and Poor's 500 Index is modest. For that reason, it is relatively inexpensive to replicate this index by holding the underlying stocks.
However, the turnover rate in commodity indexes is very high because futures contracts have a relatively short life and must be frequently replaced. Replacing a futures contract is a two-step process. First, the position that is nearing its maturity date must be closed out, and then a new position must be initiated in a contract that is further from expiration. For this reason, it is much more expensive to replicate a published commodity futures trading strategy or index than a stock index:
As an example, in 2004 the annual turnover rate in the most popular commodity futures index, the Goldman Sachs Commodity Index (GSCI), was 1023%, as measured in round turns (a round turn is a purchase and sale of a commodity futures contract). A portfolio of futures contracts that is designed to track the GSCI generally costs over 1% per year (100 basis points) in transactions costs. By comparison, a portfolio of stocks that tracks the S&P 500 Index can usually be managed for less than 10 basis points per year.
The costs described above are associated with simply holding the index and do not include costs associated with making any additional trades. If the investor desires to hold more or less of a particular stock or commodity futures contract then the costs associated with a given futures index, the transactions and turnover costs are increased further.